Patents and Trademarks

Offshore companies are often used as the ultimate owners of patents, trademarks and other IP, licensing other group companies (or arm's length licensees) to exploit the IP, and to generate royalty returns. The income and gains deriving from such IP are generally not liable to taxation in the offshore IP-owning company's jurisdiction.

Aside from the obvious tax benefits of holding IP offshore, there are other benefits. On the whole, offshore jurisdictions are stable and well-regulated. Although legally and fiscally independent, such jurisdictions often enjoy the protection of powerful "parent countries". Jersey is a particularly good example, being a dependency of the UK.

Jersey is a particularly suitable jurisdiction for the holding of IP rights, especially given its well developed regulatory, legal, banking and investment management infrastructure. The rule of law has a very strong tradition in Jersey. Its commercial courts are internationally respected, and the UK is responsible for Jersey's defence and foreign affairs.

Offshore companies will normally seek to licence IP rights via intermediate jurisdictions such as the UK, Cyprus, or The Netherlands whose double tax treaty networks can reduce or eliminate withholding taxes on royalty distributions. Both the UK and Cyprus can then make onward royalty payments to Jersey (and other offshore IP-owing) companies) often free of local withholding taxes, subject to appropriate planning.

Because offshore companies in the main do not have double tax treaty networks, they suffer significant source withholding taxes on licence fees received from companies in the EU and OECD countries, which are paying for the licences to exploit the IP.

The usual solution to this problem is to ensure that the offshore company licences a group company in a country with a suitable double tax treaty which can eliminate or reduce such source withholding taxes.

Example

X Ltd registered and resident in Country X, which has a double tax treaty with Cyprus which reduces source withholding taxes in Country X on outward-bound royalties from 25% to 0% - 10%.

Comment

Licence fees paid by Cyprus company to Jersey company are not taxed in Jersey.

With appropriate planning Cyprus withholding taxes on licence fees payable to Jersey company can be eliminated.

With appropriate planning Cyprus IP companies can benefit from the EU Interest and Royalties Directive or a double taxation convention to eliminate withholding taxes on royalties paid by sub-licensees in EU member states.

Related Pages

If you want advice on the best jurisdiction for your company formation or initial guidance on your case, you can speak to one of our experts. One of our Corporate & Trust Planning Consultants will be in touch with you shortly to give you all the information you need.